By Teri Williams
Contributing Columnist
What do credit scores and polls have in common? Both are used to predict the future.
Polls seek to predict who will win or lose an election. Credit scores seek to predict who will pay back a loan.
Yet, like any statistical model, there are limitations to their accuracy. Neither can predict with 100% certainty. So they keep evolving to improve their performance.
According to a Pew Research Center 2022 study as described in “How Public Polling Has Changed in the 21st Century”, most (61%) of national pollsters changed their methods dramatically over the years. Telephone polling with live interviewers used to dominate the industry in the early 2000s.
However, since 2012, telephone polling has fallen due to declining response rates (people don’t answer their phones) and increasing costs. In 2022, just 10% of pollsters use live phone interviews as their only method of polling.
On the other hand, the number of national pollsters using online surveys increased dramatically from 1 in 2000 to 46 pollsters in 2022. The use of probability-based panels, where a group of people, recruited at random, agree to take a survey on an ongoing basis, has also increased, from 1 in 2002 to 23 national pollsters in 2022.
Finally, the use of multiple methods, including phone, online and panels, also increased. In 2022, 17% of national pollsters used at least three different methods, up from 2% in 2016.
The expansion of polling methods was done to improve accuracy. It appears to be working.
In 2022, according to FiveThirtyEight, which rates pollsters on their accuracy, the polling industry had one of its most successful election cycles in U.S. history. Polls were more accurate, with a lower error rate, than in any cycle since 1998.
However, one of the concerns for the 2024 presidential election is whether the polls accurately reflect the Black community. According to the same 2022 Pew Research Study, the number of national pollsters who use text messaging surveys has increased but is still relatively low (only nine pollsters) and even then, it’s only used in combination with other methods. Who they are reaching without text may not accurately reflect the Black community. The verdict is still out for 2024.
As with polling, there have been improvements in credit scores too. In 2020, updated credit scores were introduced called FICO 10 and FICO 10T. According to Nerd Wallet, FICO updates its scoring models about every five years. Algorithms are analyzed and updated to better predict risk.
However, this is the first time the company has offered two versions of its score.
The difference between FICO 10 and FICO 10T is that the T stands for trended data. The 10T version looks back over at least 24 months of activity to predict future credit behavior. If you think of a traditional FICO as a snapshot, the 10T would be more like a short video.
For most people, changes in their scores from the new scoring models is likely to be less than 20 points. However, when applying for a mortgage, 20 points can be decisive in getting approved or getting a better rate.
As an example, your FICO score using FICO 10T can rise by 20 points or more if you experience occasional high credit card balances. For example, if you take a vacation on a credit card — and then pay off your balance — the trended data won’t penalize you as much. It looks at balances over time and sees you bringing a temporary high balance down.
On the other hand, your FICO score may decrease using FICO 10T if you took out a personal loan to consolidate credit card bills, but now your card balances are going up again; or you’re using credit cards to get by and your balances are growing.
Although the new FICO score is an improvement, most lenders are not using the latest score. Most lenders still use the FICO 8 for non-mortgage lending decisions. For mortgages, FICO 2, 4 or 5 are used.
According to the Federal Housing Finance Authority, which approved the new FICO score for Fannie Mae and Freddie Mac mortgages, fully implementing the score will take time. So, if you’re applying for a loan, ask your lender what version of FICO they are using to ensure you are getting the best score possible.
In addition, one of the concerns for the Black community is whether credit reports, which are the basis for the FICO score, accurately predict the credit performance of our community.
The Consumer Financial Protection Bureau recently proposed a new rule that will ban medical bills from credit reports because medical debts provide less predictive value to lenders than other debts on credit reports. This could improve the credit scores of Black Americans, which could result in higher home ownership.
What we see from polls and credit scores is that although predictive models are not perfect, they continue to evolve. The question is, are they evolving to reflect the Black community. 2024 is the year to watch the polls and your credit.
Teri Williams is the president and chief operating officer of One United Bank, the largest Black-owned bank in the United States.
LIFTOUT
One of the concerns for the Black community is whether credit reports … accurately predict the credit performance of our community.
